Environmental Commitment and Economic Performance – Short‐Term Pain for Long‐Term Gain

Abstract

ABSTRACTAlthough an increasing number of studies have begun to investigate the relationship between firms' environmental practices and economic performance, one of the issues that have been neglected involves the time lag between environmental investment and economic performance, as well as the tradeoff between short‐term costs and long‐term benefits. By utilizing a sample of publicly listed corporations in Taiwan over the period 1996–2008, we find that the relationship between economic performance and ISO certification is neither strictly negative nor strictly positive, but is instead U shaped. The evidence suggests that, although a firm bears costs for environmental management in the short term, the benefits of environmental management accumulate over time after environmental certification, and a firm benefits from environmental management in the long term. The result also provides an explanation for the mixed evidence on the relationship between proactive environmental strategies and economic performance by documenting a non‐monotonic relationship between environmental management and firm performance. The finding thus implies that government subsidies for ISO certification can be rationalized, since they help firms to overcome the barrier associated with the costs of certification, and encourage them to obtain ISO certification. Copyright © 2013 John Wiley & Sons, Ltd and ERP Environment